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HMRC internal manual

Business Income Manual

Capital/revenue divide: introduction: exclusion of capital items

S33, S96 Income Tax (Trading and Other Income) Act 2005, S53, S93 Corporation Tax Act 2009

The basic rule for measuring profits is that the profits of a trade are calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law. See BIM30500 onwards.

Adjustments may be so required to apply the following statutory rules:

  • No deduction is allowed for items of a capital nature.
  • Items of a capital nature must not be brought into account as receipts in calculating the profits of a trade (unless brought into account under a specific provision).

What constitutes a ‘capital item’ is not defined by the statute. The concepts of ‘capital receipts’ and ‘capital expenditure’ have instead evolved through the decisions of the courts over the last two centuries, along with the converse concepts, ‘revenue receipts’ and ‘revenue expenditure’.

The disallowance of capital expenditure extends to expenditure that is incidental to the capital expenditure.

Although the essential characteristics of a capital sum are the same for a receipt as for a payment it does not follow that because a sum is capital in the hands of one party to a transaction it is capital in the hands of the other(s). For example a manufacturer may sell as trading stock an item of plant which is acquired as a capital asset by the purchaser.

You should apply the same principles to determine whether a receipt is capital as you would apply to determine if an expense is capital. The case law concerning receipts is equally applicable to expenses and vice versa.

For businesses opting to use the cash basis from April 2013, there are special rules for some capital receipts and expenses (see BIM70020, BIM70035, BIM70035)